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Debt maturity without commitment

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  • Niepelt, Dirk

Abstract

How does sovereign risk shape the maturity structure of public debt? We consider a government that balances benefits of default, due to tax savings, and costs, due to output losses. Debt issuance affects subsequent default and rollover decisions and thus, current debt prices. This induces welfare costs beyond the consumption smoothing benefits from the marginal unit of debt. The equilibrium maturity structure minimises these welfare costs. It is interior with positive gross positions and shortens during times of crisis and low output, consistent with empirical evidence.

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  • Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    • Handle: RePEc:eee:moneco:v:68:y:2014:i:s:p:s37-s54
    DOI: 10.1016/j.jmoneco.2014.08.006
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    More about this item

    Keywords

    Debt; Maturity structure; No commitment; Default;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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